Reacting to gas prices, IRS raises mileage payment to 48.5 cents

8-cent increase per mile is largest ever, and likely first one made midyear

In response to the sharp jump in gas prices, the Internal Revenue Service said yesterday that it was raising the standard mileage reimbursement rate by 8 cents to 48.5 cents a mile, the single largest increase ever.

The new rate will be retroactive, applying to business travel from Sept. 1 through the end of this year.

Workers who use their vehicles for business can deduct their actual expenses or the standard mileage rate on tax returns. The federal government and many private employers use the IRS rate when reimbursing workers who use their cars on the job.

Traditionally, the IRS sets the rate each fall for the following year. But IRS Commissioner Mark W. Everson said this is the first time he could recall that the agency had raised the mileage rate in midyear.

"The way we see this, it's about basic fairness to the taxpayer," Everson said in a telephone conference yesterday. "We responded to the recent price increase so they get the full benefit that they deserve."

The IRS has made midyear adjustments in the past - it lowered the rate in April 1999 by 1.5 cents to 31 cents a mile.

The bigger deduction is particularly good news for workers who spend more time in vehicles than in cubicles.

Charlotte Savoy, a Realtor with the Pat Hiban Real Estate Group in Ellicott City, said she drives about 25,000 miles a year for business, so the chance to deduct an extra 8 cents a mile on her tax return will make a difference.

But it's hardly enough to keep up with the extra cost. Both of the vehicles she uses are large - including a Chevy Suburban SUV that cost $102 to fill up last weekend.

"That's a pretty large amount of money to be spending on gas," she said. "Hopefully, it won't stay like that forever."

As gas prices have shot up, more have questioned whether drivers are better off deducting their actual expenses rather than using the standard mileage rate, said Mark Luscombe, a principal with CCH Inc., an Illinois-based tax information provider.

"This will be great," he said. "This will help keep people in the standard camp."

Besides business-related travel, the IRS also raised the mileage rate for deductible medical or moving expenses from 15 cents to 22 cents a mile. That new rate also applies for the last four months of this year.

The mileage rate for those who volunteer at charities is set by Congress and remains at 14 cents per mile.

Overall, the bigger tax deduction will mean a loss of tax revenue for the government. Without giving specifics, Everson said revenue would be reduced by "several hundred million" dollars.

Many are suggesting that gas prices will fall in the coming months, Everson said. The IRS will wait closer to January to set the rate for next year, and it could be lower if gas prices drop, he said.

Gas prices have been climbing for more than a year. They spiked in the days after Hurricane Katrina struck the Gulf Coast.

The average price of a regular gallon of gas nationwide this week was $3.02, a 64 percent increase over a year ago, according to AAA. With the 8-cent bump, the new mileage rate is about a 20 percent increase.

Everson said the formula for the mileage rate takes into account all sorts of costs involved in operating a car beyond gasoline. "The cost of the car has not increased," he said. "The cost of the car is the biggest piece."

While employers often use the IRS rate as a guide for reimbursing workers, not all do. Some said they don't expect to raise the rate for the rest of the year.

Barbara Lucas, a spokeswoman for toolmaker Black & Decker Corp., which has a sales force spread out across the country, said the company's reimbursement rate is 40.5 cents a mile - the same as the IRS' old rate. But the Towson-based company has no plans to follow the agency's lead and increase it before 2006.

"We only adjust it once a year," she said. "We're not going to make a change right now."

Garrett County in Western Maryland will increase its rate because it follows the IRS, said county administrator Monty Pagenhardt. He said he doesn't believe it will have much impact on the budget, though. Garrett encourages its employees to use county vehicles when they need to drive somewhere for work.

"It's actually cheaper for them to take a car than to reimburse the mileage," Pagenhardt said.

The Tri-County Council for the Lower Eastern Shore of Maryland, a government agency, is also trying to avoid reimbursing employees. After the IRS increased the reimbursement this year by 3 cents to 40.5 cents a mile, Tri-County changed its operations in July, starting a five-vehicle motor pool for employees to use for out-of-town meetings and other necessary trips. They can't use their own cars unless the pool is tapped out.

"We're trying to be cheap," said the executive director, Michael P. Pennington. "We've just found that it's less expensive to supply them with one."

Local governments don't have to follow the IRS' lead on reimbursement rates, and they might not, Pennington noted. They're already getting hit hard by the cost of gas to fuel their fleets of buses, public works trucks and other vehicles.

If employers pay less than the IRS rate, workers can deduct the difference on their tax returns as a miscellaneous itemized deduction, said CCH's Luscombe. But they'll need plenty of deductible expenses.

"It has to be over 2 percent of [adjusted gross income] before you can deduct anything," Luscombe said.